Ben Bernanke morphs into Kenneth (Kenny-boy) Lay and Jeffrey (Keith the thief) Skillings

Kenneth Lay and Jeffrey Skillings brought Enron to its knees and defrauded millions of shareholders by the practice of hiding losses from the Enron  accounts through the creation and manipulation of ghost accounts. Both deviants eventually were brought to some kind of rough justice. Lay essentially committed suicide before his appeal could be heard,  by abandoning his heart medication, in order to protect stolen property for family. Skillings currently luxuriates in a low security penitentiary in Colorado, hoping that he can purchase his way to freedom via a Supreme Court that is deemed to be soft on white collar crime and on all matters constitutional.

On depression-era economics, Ben Bernanke has earned an F grade, mis-reading every aspect of the Hoover and FDR years.  However, he is proving to be a quick learner of Enron political economics. No doubt after corresponding with Andrew Fastow and Jeffrey Skillings, Bernanke has set up a false accounting system at the Federal Reserve. Applying misleading words to the new accounting system, Humpty-Dumpty Bernanke has designated his new accounting policy as providing  a more transparent presentation.

The problem that confronts Bernanke, like the one that confronted Enron, is the large pending losses associated with the $2 trillion plus of securities that currently rot on the balance sheets of the Federal Reserve. If and when the Federal Reserve should lose sufficient money on these assets – either by selling toxic securities at a loss, or by raising interest payable on reserves to levels in excess of the returns on its dreadful portfolio,  the Fed’s capital base of $52 billion would be wiped out.  It cannot build up this capital base in good times, because it has a legal obligation to transfer immediately to the Treasury any amount above that $52 billion base.

In the absence of Humpty-Dumpty accounting rules, the Federal Reserve would then be forced to go to Congress to beg for money. Who can be sure that the present Congress would throw any dollar bills in its direction, at least without demanding some very senior resignations from the Fed?  Ben Bernanke enjoys his power to promote progressive socialism and his limousine privileges far too much to expose himself to such an outcome. Hence the new accounting rules.

On January 6, 2011, the Fed released a deliberately opaque document entitled: ‘Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal reserve Banks’. Few commentators picked up on such an unsexy headline.  Surely they should have done so.

Under the new accounting rules outlined in this document, any losses incurred by the Federal Reserve will not hit the capital account of the Fed.  Instead, these losses will be allocated a new ‘Interest on Federal Reserve Notes’ item.  The Fed’s capital, for book-keeping purposes, will remain intact.  The Fed, hence, will have no obligation to transfer money to the Treasury to cover its losses until/if ever there are sufficient gains in its portfolio. The Fed will incur no dangerous necessity to take a begging bowl to a skeptical Congress, bearing a Dickensian placard: PLEASE SIR, I WANT SOME MORE’.

GAAP accounting rules do not allow private companies to get away with such accounting fictions. It is an even more dangerous practice in the hands of the Fed. For, if the Fed gets sufficiently deeply into the hole – as I expect that it will – ultimately it will repay the Treasury with newly-minted money, effectively monetizing its losses. This is the well-travelled road to hyper-inflation; the road that Ben Bernanke has surely chosen for the United States.

Hat Tip: Reuven Brenner, ‘The Federal Reserve: Fool Me Once, Shame On You…’ Forbes, January 30, 2011

Good goverance by the GOP: 2011-2012

Given that the White House is in Democratic hands, the nation is blessed by the fact that this President lacks the intelligence, the leadership qualities, and the work ethic to lead effectively.  The nation is now blessed also by the fact that a decisive majority of the electorate understands that  a Democrat-controlled Congress implies progressive socialist legislation. In this reality lies a significant political opportunity for the GOP.

The first precept of successful governance is to do well while doing good. If a political party legislates wisely while rendering itself unelectable, its good policies quickly will be reversed. If a political party takes care of its own majority while legislating badly, why would it want to stay in office?  The do well while doing good precept focuses politicians minds remarkably effectively.

The economy of the United States currently is in serious jeopardy. The full extent of the danger is masked by the international reserve status of the dollar. But that is ephemeral, if present trajectories are not quickly reversed.  At the same time, recovery is fragile, weighed down by the dreadful economic policies of the Obama administration over the period 2009-2010. What to do, what to do?

The best that the GOP can hope for in 2011 is to trim projected fiscal outlays by $100 billion – peanuts I understand when weighed against a projected $1.5 trillion deficit.  However, a determined GOP can pull this reduction off, splitting the Democrats both in the House and in the Senate. A small victory is always important when turning the hinge of fate.  Remember the importance of Montgomery’s victory over Rommel at El Alamein in 1943. ”This is not the end. It is not even the beginning of the end.  But it is, I believe, the end of the beginning!’

Then, instead of wasting time and energy in pursuing hopeless battles – such as overturning Obamacare while its’ originator still wields the veto power – the GOP should turn to the issues raised by the Deficit Commission. It should link with sympathetic Democrats, yes even with the Messiah, if he is so inclined, and attempt to formulate a long-term program of fiscal reform, to be presented to the nation in the 2012 elections,

This, in my judgment, comprises doing well while doing good from a GOP perspective:

1. Secure agreement to legislate for increasing the age of access to Medicare and to Social Security from 67 years to 70 years by 2015.

2. Link Social Security pensions and pension increases to the CPI, not to average wages.

3. Tax social security income fully at the same rates as all other income.

4. Increase Medicare charges on all recipients who earn more than $100,000 per annum at 2010 prices. And allow all Medicare recipients to supplement medical payments at will.

5. Limit access to Medicaid strictly to families earning no more than poverty level incomes.

6. Trim discretionary federal spending by 15 percent in real terms by 2015.

7. Eliminate all tax loopholes, including personal deductions, without exception. Tax incomes at 10 percent up to the defined poverty level. Thereafter, tax all  personal income at 25 percent . By so doing, all individuals are made aware that spending increases hit their wallets. There is no representation without taxation, unless one lives in the gutter.

In my judgment, such a reform initiative, fully prepared and well-articulated, is a vote winner for 2012. And if President Obama should sign off on such a program, in order to win re-election?  Well so be it. The nation would be well-served. There is no need to rely on men of good will to achieve success. Just tie those of ill will to the mast of the good ship!

The United States should cease all meddling in the Middle East

The Middle East is stack full of dictators. Some of these dictators are favored by the  United States government.  Some are not. None of them rank highly in terms of political and economic freedoms. Americans are taxed to supply many of these distasteful dictatorships with billions of dollars of aid. With the single exception of Israel, the Middle Eastern street majorities express hatred mixed with contempt for the U.S. government. So why not withdraw completely from all meddling in the region, save for a mutual defence treaty with Israel, eliminate all aid to the Middle East, and simply stand committed to free trade with all Middle Eastern  nations (other than for military materiel)?

Oh, yes! And why not send out an unequivocal signal that any significant attack on U.S. properties world -wide will invoke an automatic military response equivalent in scale and nature targeted directly onto government buildings in the capital city of any country identified as the geographical source of that attack, without discrimination of any kind?

Oil, some of you may mention?  We cannot survive without oil imports. If that is so, then we have little to fear. Countries dependent on oil revenues and bereft of U.S. aid, will surely trade oil on world markets. The U.S. will not be embargoed if it does not meddle. And the U.S. will not be embargoed, if trade with the U.S. is the only way to secure U.S. dollars.

With such policies in place, United States citizens would be much safer, and much richer. The onus would lie entirely on those who reside in the Middle East to manage their own affairs. If they continue to tolerate vicious dictatorships then the responsibility is their’s and their’s alone, as it should be in a rational world.

Financial Crisis Inquiry Commission on the right track; but only at the starting gate

Preliminary quotes from the Report of the Financial Crisis Inquiry Commission indicate that the Commission has done a good job.  However, the Commission completely under-estimates the  venality of the relationship between big business and corrupt politicians in the United States market-place of politics.

The Commission correctly faults the behavior of Fed Chairmen, Alan Greenspan and Ben Bernanke, both for their policies of loose money and for their negligence in failing to detect the devastating risks to the national economy inherent in the house price bubble generated by lax mortgage standards. In some countries, both Greenspan and Bernanke would have been expected to commit sepuku or to take bullets to the head for the damage they wrought upon the People.

The Commission also correctly recognizes the role played by President George W.  Bush and the Congress in promoting home ownership for vote reasons to a sub-population that possessed neither the wherewithall nor the work ethic to justify such an asset acquisition. I suspect, however, that it has simply no idea of the extent to which Senators and Representatives are purchased by lobbying and campaign contributions from large corporate bodies. 

The Commission notes that the financial industry alone expended $2.7 billion on lobbying between 1999 and 2008.  It also notes that individual politicians and committees overseeing the financial industry received more than  $1 billion in campaign contributions over the same period. Almost certainly, this is the tip of the iceberg. When unscrupulous individuals such as Lloyd Blankfein of Goldman Sachs dish out the cash, most of it is not displayed for public attention. If Wikileak can only obtain more information on Swiss and other offshore numbered accounts, surely they would find many  U.S. politicians’  names  linked to such balances.

One can only laugh when the question is raised: could such an event ever recur?  Of course, it will. No one responsible has been punished for his contribution. Lloyd Blankfein still lives high on the hog while Bernie Madoff rots in jail.  Alan Greenspan still enjoys a full social calendar, while Ben Bernankes still rides in his government limousine.  Barney Frank was re-elected to Congress after writing the new financial regulations, together with his co-conspirator in formulating the sub-prime mortgage crisis, Chris Dodd, who has now retired to a life of high-living after corrupting the corridors of the Senate for half a lifetime.

Almost all  the big banks were bailed out and still remain at the public trough, following misbehavior that should have resulted in bankruptcy and public contempt. The agencies of government that failed to oversee the banks  – FDIC, SEC and the Fed – still exist and show signs of ongoing engrossment.  What’s not to like in the corrupt environment of Satan’s City?

The State of President Obama’s Mind: Empty!

When a President talks in vacuous phrases – Obama referred to ‘winning the future’ on some 12 occasions in his address –  and when he falls back on over-used verbal garbage – Obama  advised once again that ‘Sustaining the American dream has never been about standing pat.  It has required each generation to sacrifice and struggle, and meet the demands of a new age’ without providing any realistic suggestions as to why private markets are not already offering such opportunities to aspiring individuals, one knows that he is out of ideas, that his mind has morphed into a vacuum.  Such was evident in last night’s State of the Union address.

Let me briefly outline the missing content from Obama’s address:

“My fellow Americans:  When I assumed office in January 2009, the U.S. national debt was equal to 41 per cent of gross domestic product.  As a direct consequence of my own actions, the national debt was equal to 60 percent of gross domestic product in December 2010.  According to projections from the White House, the policies that I have set in motion, if unadjusted, will increase the national debt to 90 percent of gross domestic product by 2020. And that is based on highly optimistic rates of economic growth. At this level, there is no realistic prospect of preserving the international reserve status of the U.S. dollar.

Let me present to you some admittedly unpleasant fiscal arithmetic, for which my administration is partly responsible. If federal tax revenues are held to the historical limit of 18.3 percent of gross domestic product, and if social security, medicaid and medicare increase together from 7.4 percent of gross domestic product to 10 percent  of gross domestic product by 2020, as is projected, a fiscal nightmare arises for this country. By that date, balancing the budget while maintaining those three programs whole, will require one of three extremely unpleasant alternatives, namely (1) raising taxes by the 2010 dollar equivalent of $12,630 per annun for each household; (2) eliminating every federal program other than social security, medicaid and medicare; or (3) increasing the level of the national debt to catastrophic rates of gross domestic product.

My fellow Americans:  The sooner we act to avoid such a dreadful choice, the better. I ask Congress to work with me to move to full budget balance, including all off-budget items, by December 2016. I recommend tax reforms allowing for tax revenues to stabilize at 20 percent of gross domestic product, and public expenditure cuts designed to lower federal outlays to 18 percent of gross domestic product until the national debt has been reduced to 30 percent of gross domestic product, when federal expenditures may rise to 20 percent of gross domestic product.

In such circumstances, there is no scope for any increased federal expenditures  in any area of the economy for the foreseeable future.

I understand that such measures will call for significant sacrifices on behalf of our non-voting future generations. But I have to advise you that the recently-elected British government has already put in place budget adjustments similar in magnitude to those that we confront. Surely, we do not wish to be left in the fiscal dust by our friends and allies across the Atlantic Ocean.”

From Government Motors to Government Electric: Obama pursues national socialism

During the first two years of his administration, President Obama judged that what was good for Government Motors was good for Obama.  For the final two years, he  has decided that what is good for Government Electric is good for Obama.  The fact that what is good for each of these crony capitalist organizations is bad for America does not appear to have crossed the President’s economically illiterate, but politically street-smart  mind.

The key to understanding national socialism is recognition of the unhealthy vertical and horizontal  network relationships  that subsist in such a regime between big finance, big business,  big labor and big politics. These networks are dedicated to the destruction of laissez-faire capitalism and limited government.  They are designed specifically to destroy individual liberty and to subjugate an independent People into fearful subjects of a ruling oligarchy that seeks to enrich only itself.

Such is the nature of  emerging Obamanic political economy. In reaching out to Government Electric, by naming GE Chief Executive Jeffrey R. Immelt as head of the President’s Council on Jobs and Competitiveness, President Obama seeks to consolidate national socialism within the United States. Surely, Obama and Immelt are linked together  only by the bond of mutual greed.  For as recently as the summer of 2010, Immelt whined to Italian businessmen that U.S. business disliked Mr. Obama as much as Mr. Obama disliked business.

Despite any deep-rooted dislike for the President,  Mr. Immelt has long displayed an aptitude for keeping his snout well down in the Obamanic public trough.  He has rent-sought with a truly crony capitalist zeal by lobbying in favor of so-called green technologies and the crow-bar opening up of foreign markets. He has publicly supported a future with less emphasis on free markets and more ‘coordinated commitment among business, labor and government.’  He has publicly praised government intervention in the economy, advising his shareholders that  ‘in a reset economy, the government will be a regulator; and also an industry policy champion, a financier and a key partner.’  All this is the essence of  the brand of national socialism practised in the Third Reich.

Mr. Immelt’s payoff is already high and rising. GE has received $24.9 million in stimulus money, primarily for ‘green technology’ projects.  GE escaped with a wrist-slap in settling charges, brought by the Securities and Exchange Commission, that the corporation had violated the Foreign Corrupt Practices Act by paying out kickbacks to Iraqi government agencies in order to secure lucrative contracts.  GE is now likely to benefit from White House withdrawal of its opposition to GE’s alternative engine for the Joint Strike Fighter.  GE is likely now to secure the same Obamacare waivers that the administration has given to its major labor-union supporters. The benefits from cozying up to national socialism are seemingly endless.

As The Washington Times editorial for January 25, 2011, notes, Freedom Works and the Free Enterprise Project launched a campaign on January 24, 2011 to have Mr. Immelt replaced as GE CEO, calling his a ‘poster child of what’s wrong with business leaders today’.  Mr. Immelt will not be at all concerned by such an initiative. He will laugh it off later this evening as he cozies up to his now-beloved President,  from a prominent seat during the State of the Union Address.

Rich-Man, Poor-Man in Communist China

“The relationship between rich and poor in China is different.  China’s stellar growth has lifted some 500m people out of poverty.  Much of the credit belongs to Chinese entrepreneurs.  Since Mao’s boot was lifted from their necks, they have built marvels, from the skyscrapers of Shanghai to the factories of Guangdong.  Yet mainland Chinese business leaders operate in the shadow of a secretive and unaccountable ruling party.  To get on, many join it.  Some do so reluctantly, to avoid being crushed.  Others do so gladly, hoping to use the power of the state to enrich themselves.”  ‘Asia’s new aristocrats’ The Economist, January 22, 2011

China is governed not by the rule of law, but by the rule of men.  Although individual members of the Communist Party are not completely above the law, there is little to prevent the Party Bosses from abusing their power.  The children of many of China’s leaders have amassed large fortunes in murky ways.  Banks typically lend to the well-connected instead of to the credit-worthy.  Local leaders levy taxes that have no basis in law.

The fact that commercial success often depends on political ties makes the growing inequality in China especially galling to those with socialist inclinations.  During the mid-1980s, Chinese incomes were more evenly distributed than India’s – no doubt because China was at least nominally Communist, whereas India still operated under a caste system.  But now, China is less equal than India, with a Gini coefficient of 0.4 to India’s 0.37.  China now boasts of 800,000 dollar millionaires, while 500m people live on less than $2 a day.

The disparity between rural and urban incomes is the largest of any big country – city-dwellers on average make two-and-a-half times as much as rural Chinese.  This disparity is protected by the implementation of a system of residence permits, called hukou, that resembles the pass system utilized in South Africa under apartheid. 

Individuals who possess a city hukou can live and work freely in that city.  Those with a rural hukou can come to a city only as guest workers.  In consequence, some 150m rural Chinese work in cities without any right to live there.  Typically, they cannot use public schools and clinics, and they are barred from public housing.  If they protest, they are deported back to the countryside. A rule in Shanghai allows a local man to obtain a hukou for his wife from outside only after 15 years of marriage. 

The hukou system is designed to help the Communist Party to control the people.  As in South Africa, it is building up internal tensions that eventually may topple the regime.

If the hukou system were to be removed, some 250m peasants would move to the cities, clogging up the public schools and building slums on the doorsteps of their more affluent neighbors, while simultaneously competing for their jobs. Income inequalities would erode in response to such migration pressures. But that is a form of equality that high-income members of the Party apparently do not welcome.

Peasants of China unite!  You have nothing to lose except your poverty!

It is rational to fear Islam

Free speech is an essential element of any free society. Both Britain and the United States officially provide constitutional protection for free speech. However, as with so many other supposed constitutional protections, free speech is now only selectively protected. In its place, bigots challenge many forms of speech under the guise of political correctness. Surprisingly, in Western nations so recently subjected to Islamic terrorism,  concerns expressed about the danger posed to human life by militant Muslims  meet with increasing hostility by the race relations industry and by politicians who thrive on campaign contributions from such sources.

A recent example of such attempted speech suppression was a statement delivered last week in Britain by Baroness Sayeeda Warsi, a Conservative member of the House of Lords, and a Muslim.  In an address delivered at Leicester University, Baroness Warsi attacked the growth of Islamophobia in Britain, arguing that its flames were fanned by bigotry and religious ignorance.  The Baroness is entitled to her opinion. In my judgment, however, she is dangerously ill-informed.

If  Islamophobia means anything at all, it means an irrational, baseless and pathological terror of Islam, the religion.  Those of us who currently enjoy the many freedoms provided by western democracy have every reason to fear Islam as a religion.

Theocratic Islam is incompatible with democracy, demanding supremacy of  sharia (Islamic law) over the democratic rule of law.  It imposes upon society a patriarchal suppression of women, including their inequality under sharia law.   It  demands medieval punishments for apostasy, adultery and even theft, including death by stoning and the severing of limbs. It insists upon a cruel form of animal slaughter.  It calls for violence and anti-Semitism from within its so-called sacred texts.   In its most extremist manifestations, it calls for a permanent jihad against all non-believers, until they are terminated.

A recent British study by Policy Exchange shows that 37 percent of British-born Muslims, aged 14-24, advocate the imposition of sharia law across Britain,  37 percent would like to send their children to Islamic state schools, and 36 percent believe that any Muslim who converts to another faith should be punished by death.  These numbers demonstrate dramatically that Islamic enemies of individual freedom are already well-embedded across Britain.

What many non-Islamists feel is an entirely rational anxiety or fear of Islam for the beliefs that it upholds and for the mayhem that some of its adherents are willing to impose on non-believers. Care and caution in watching closely over the behavior of Muslim conclaves, especially those who frequent mosques known to be led by fiery Imams, is rational and wise.  For, unlike Christianity, Islam does not advocate that those who suffer perceived harm should turn the other cheek. Islam is a violent, not a peaceful religion as it is interpreted by extremist factions. And extremist factions are tolerated, if not lauded, across the Muslim populations of Britain and the United States.

Hat Tip: Minette Marrin, ‘It’s not a phobia – it’s rational to fear Islam’, The Sunday Times, January 23, 2011

Leading black economist urges blacks to discard state ‘support’

Walter Williams is the world’s leading black economist. He is also a relentless advocate of limited government and laissez-faire capitalism.  This is not at all surprising. For unlike the large majority of  leading economists –  black or non-black – Walter Williams pulled himself up from one-parent poverty in Philadelphia’s housing projects and from a youth dominated by his exposure to Marxist doctrine. Walter Williams understands only too well what still prevents many blacks from fulfilling their potential in the United States; and it is not free markets, but rather the progressive socialism that permeates the nation’s post-1929 political system.

Walter Williams began his adult life as a black radical, much more sympathetic to Malcolm X than to Martin Luther King, because Malcolm X was willing to confront discrimination through the use of violence, whereas Martin Luther King was not. He was introduced to economics during his junior year at California State College in Los Angeles after reading W.E.B. Du Bois’s book, Black Reconstruction in America, a Marxist interpretation of the South’s transformation after its defeat in the War of Northern Aggression. One might say that, at this moment in time, Walter Williams was on the road to an affirmative action life of under-achievement.

But Lady Luck was on his side.  He enrolled for a doctorate in economics at UCLA – one of the top economics departments in the nation and one of only a small handful of free market programs.  Walter proved to be a fast learner, imbibing the free market economics of Armen Alchian, Bill Allen, Jim Buchanan,  Sam Peltzman and Milton Friedman, while reading the wisdom of the great scholars of the Scottish Enlightenment – David Hume,  Adam Ferguson and Adam Smith. 

Walter Williams learned from these intellectual giants how to think with his brain instead of his heart. He graduated with his doctorate in 1972 armed intellectually to wage war against the state on behalf of all Americans, black and non-black alike.  His first book, The State Against Blacks, published in 1982, argued that laws regulating economic activity are far greater impediments to black progress than racial bigotry and discrimination.

 ‘The fact that in some areas black people are huddled in their homes at night, sometimes serving meals on the floor so they don’t get hit by a stray bullet – that’s not because the Klan is riding through the neighborhood.’

Walter Williams is blessed with one of the sharpest intellects that I have ever encountered. He is one of the finest individuals that I have been privileged to know. He was the best Departmental Chairman that I ever worked with (other than myself in England).  I view him as my very best friend. And I recommend everyone to purchase a copy of his new auto-biography, Up from the Projects, and to read his interview – The State Against Blacks –  published in The Wall Street Journal, January 22, 2011.

Ben Bernanke has jammed the Fed between a rock and a hard place

U.S. Treasurys are signaling trouble for the Federal Reserve Board – trouble that it has brought down upon itself and that it has deliberately imposed on the American public. The market in Treasurys is behaving in ways that suggest a growing expectation of stagflation in the U.S. economy. 

The relevant focus is the Treasury yield curve.  The yield curve refers to the difference between short-term and long-term interest rates on U.S. Treasury debt.  When the economy is expanding, this curve typically has an upward slope.  The slope is at its steepest during the earliest stages of the recovery. Eventually, as investors anticipate that the Fed will raise interest rates to stave off inflation, the yield cuve flattens, with short-term rates increasing and long-term rates compressed.  Occasionally, the yield curve may even invert, when investors anticipate that the outcome of Fed intervention will be recession.

The U.S. economy is currently recovering.  Yet the yield curve, far from flattening, is steepening.  The spread between two-year and 30-year Treasury yields last week hit a record four percentage points.  The implied annual inflation rate over a five-10 year horizon has now moved up above three percent and towards levels last seen when the Fed’s previous rate-rise cycle began in mid-2004.

In June 2004, the U.S. unemployment rate was 5.6 percent, leaving the Federal Reserve with plenty of scope to tamp down potential inflation by growth-reducing increases in interest rates.  In January 2011, the unemployment rate is 9.4 percent.  Ben Bernanke must now be perspiring heavily in the expectation of pressure from the White House to run the inflation gauntlet. President Obama surely does not want to enter the 2012 election campaign with unemployment in excess of 10 percent and rising. Nor will the Department of the Treasury relish floating new notes with  short-term interest rates in excess of 4 percent per annum.

So stagflation is on the way, as I have warned repeatedly in these columns.  Thank you Ben Bernanke for helping to wreck the U.S. economy.